Prime Minister Narendra Modi on Tuesday announced the scrapping of high denomination currency, with an aim to curb black money. Usually, high value notes are the basis of any form of corruption and illicit deals related to unaccounted money.

Real estate and gold transactions are the main investment instruments used by individuals to hoard their black money. (Source: FE)

Prime Minister Narendra Modi on Tuesday announced the scrapping of high denomination currency, with an aim to curb black money. Usually, high value notes are the basis of any form of corruption and illicit deals related to unaccounted money. According to a report in The Indian Express, economists and bankers think that the decision by the Indian government will cause a ripple effect on real estate and gold transactions. Apart from that it will also affect the political spendings in the upcoming assembly elections in Uttar Pradesh and Punjab, scheduled in 2017. Both the states, generally witness huge cash spendings during elections. This step to demonetise the Rs 500 and Rs 1,000 notes will have an impact on the assembly elections too as political spendings are huge in the country. Accroding to a Centre for Media Studies report, nearly Rs 30,000 crore was spent during the 2014 general election, while official spending only accounted for Rs 7,000 to Rs 8,000 crores.

Major industries including the real estate sector have been conduits of black money in India. When in comes to the real estate sector, it contributes to around 11% of GDP, according to Ministry of Finance’s 2012 White Paper on Black money. Ambit Capital’s report says that black money in India is more than Rs 30 lakh crore which is about 20% of GDP. Around Rs 16.6 crore total currency is in circulation out of which a large part is contributed in the form of Gold and real estate investments, according to an IE report. Deepak Parekh, chairman HDFC Ltd told IE, “I expect price of real estate to come down. One expects the price of real estate should come down in medium term.” Anuj Puri, chairman and country head JLL told IE, “The banning of higher currency notes is a major move which will help curb unaccounted-for cash in the real estate sector. We have just witnessed a tremendous step towards increased transparency in the Indian real estate industry. The effects will be far reaching and immediate, and shake up the sector in no uncertain way.”

According to the Ambit report, a major chunk of the black money gets locked up in the form of physical assets like like real estate and gold as they are historically been a preference than financial savings instruments in the country. This is because of the fact the physical assets can be funded by black money, but in case of financial assets it leaves a strong paper trail. PC Jewellers managing director Balram Garg told IE, “This is a very good decision for long term especially for the organised sector. There could be impact on pure gold demand.”